Standing Committee B

[Mr. Frank Cook in the Chair]

Finance Bill

(Except clauses 11, 18, 40, 43, 44 and 69 and schedule 8)

Frank Cook: I am anxious to ensure that we preserve the most amenable atmosphere for affable exchanges today, so I am happy to allow all members of the Committee to divest themselves of their upper outer garments.

Clause 24 - Deduction cases

Philip Hammond: I beg to move amendment No. 15, in clause 24, page 21, line 4, leave out from 'the' to 'that' in line 5 and insert
'Special Commissioners find, on the balance of probability, following an application by the Commissioners for Her Majesty's Revenue and Customs'.

Frank Cook: With this it will be convenient to discuss the following amendments: No. 16, in clause 24, page 21, line 5, leave out 'or may be'.
No. 31, in clause 24, page 21, line 18, leave out 
'or one of the main purposes'. 
No. 30, in clause 24, page 21, line 20, leave out from 'question' to end of line 21 and insert 
'is significantly greater than it would have been if the relevant transaction was part of a qualifying scheme.'. 
No. 17, in clause 24, page 21, line 23, after second 'the', insert 'Special'. 
No. 18, in clause 24, page 21, line 26, at beginning insert 'Special'. 
No. 19, in clause 24, page 21, line 30, after 'the', insert 'Special'. 
No. 20, in clause 26, page 24, line 5, leave out from 'the' to 'that' in line 6 and insert 
'Special Commissioners find, on the balance of probability, following an application by the Commissioners for Her Majesty's Revenue and Customs,'. 
No. 21, in clause 26, page 24, line 6, leave out 'or may be'. 
No. 22, in clause 26, page 25, line 5, after second 'the', insert 'Special'. 
No. 23, in clause 26, page 25, line 8, at beginning insert 'Special'. 
No. 24, in clause 28, page 25, line 37, leave out from 'the' to 'give' in line 38 and insert 'Special Commissioners'. 
No. 25, in clause 28, page 26, line 5, at beginning insert 'Special'. 
No. 26, in clause 28, page 26, line 9, at beginning insert 'Special'. 
No. 27, in clause 28, page 26, line 12, after 'the', insert 'Special'. 
No. 28, in clause 28, page 26, line 23, after third 'the', insert 'Special'. 
No. 29, in clause 28, page 26, line 24, leave out 'have been reasonably' insert 'reasonably have been'.

Philip Hammond: It is a great pleasure to serve under your chairmanship of this Committee, Mr. Cook, and I am grateful for the precise definition of your guidance on clothing. As we will see when exploring this group of clauses, precision in definitions is what it is all about, since it can lead to the avoidance of embarrassment and unintended consequences.
I shall follow the precedent set by the Paymaster General in our deliberations on Tuesday and, in speaking to the amendments, set out broadly the background to the important group of clauses under chapter 4. I hope that my doing so will be for the convenience of members of the Committee, so that they can understand what the amendments would achieve and the context in which we tabled them. 
It is no exaggeration to say that chapter 4, coupled with schedule 7, has given rise to the most controversy and concern outside the House. I am sure that when dealing with representations about the Bill Ministers noted that attention has focused on this part of the Bill. It is complicated. Even the concepts behind some of this stuff will not be easily comprehended by anyone who is not a tax lawyer or tax accountant employed by one of the big four firms or a large American multinational corporation. Members of the Committee, including me, will have to consider such matters carefully and slowly to ensure that we understand what the Bill is designed to do. 
Clauses 24 to 31 deal with tax planning based on arbitrage, which is the exploitation of differences within or between tax systems when the two parties to a transaction are treated differently under different systems—typically, one of the parties is transparent in one of the tax jurisdictions. The perceived mischief is that that could lead either to a situation in which the same expense is capable of being a deduction from profits in the computation of tax in two separate jurisdictions—known in the trade as the double dip—or an interest payment arising in one jurisdiction could lead to a tax deduction being claimed in that jurisdiction without the interest payment being treated as a corresponding income in the other jurisdiction. Those are the two principal matters with which chapter 4 deals. 
We have questions about some aspects of the measure, such as whether the attack is appropriate and whether it will be efficacious in what it will deliver to the United Kingdom Exchequer and economy. We also want to know about the methodology chosen by the Treasury to deal with the problems that it perceives in such matters. I shall deal with the broader questions in the clause 24 stand part debate—the clause deals with deduction cases,in which the mischief targeted is the so-called double deduction. I shall deal with the detailed issues on the receipts case when we come to clause 26 stand part. 
As a backdrop to our amendments, I should like to set out our view that the legislation is far-reaching and has a very wide scope. The Revenue has made it clear in the guidance notes, and Ministers have made clear in their statements, including those made on Second Reading, that the intention is to apply the legislation quite narrowly. The guiding principle appears to have been: draft widely, apply narrowly. The difficulty with that approach is that the taxpayer community is left at the mercy of officials' interpretation when the legislation is implemented. 
Unlike the issue that we dealt with on Tuesday afternoon, this is not about a few very wealthy people being paid in gold bars in an obvious scam to avoid paying income tax and national insurance contributions. It is about the financing structures routinely used in international investment, which underlie hundreds of billions of pounds of investment made by foreign companies in the UK. We are not just targeting a few individuals about whom, if they felt a little pain, most people would not be too concerned. We are talking about major players who are vital to the health and well-being of the UK economy. 
There is scope for huge collateral damage, both to the effective financing of investment deals and—perhaps as important—to the UK's reputation as a stable and predictable tax jurisdiction, which is already somewhat tarnished by the amount and complexity of tax legislation passed during the past few years. It is not clear to the world outside what the policy objective is, other than to grab for what is, in Exchequer terms, a relatively small chunk of money. It appears to some people that the UK Government are seeking to appoint themselves the world's policeman on arbitrage, to the uncertain benefit of the UK Treasury in the long run. We shall explore that later, because it is by no means clear that the net effect—when all the dust has settled and corporations have responded to the regime that will be imposed on them—will be to increase the UK Exchequer's tax take. It may well be that this legislation will simply have some nice side-effects for various overseas jurisdictions collecting a little extra tax, but nothing significant for the United Kingdom. Under the Bill, the UK will in some cases seek to levy a tax charge because a foreign jurisdiction has chosen to incentivise outward investment by offering tax breaks to facilitate outward investment by its companies. There is a real question about whether the UK should set itself up unilaterally to police the world investment community in this way and whether the Government have correctly identified the target and designed legislation to hit it properly so that the UK will ultimately be the beneficiary. 
Our view, and that of many expert practitioners in the field, is that there is an element of a real problem. There is potential for the use of hybrid structures in a way that would clearly constitute tax avoidance. We do not deny that and I do not think that any practitioners would. The practitioners' concern, however, is that a relatively small problem that requires excising with a micro-scalpel has been attacked by the Government with a sledgehammer.  We are supposed to take some comfort from the fact once a thing has been smashed to pieces, only a few of the crumbs found on the table will be targeted. I know that the Government have received representations to that effect from many sources, some of which I shall cite later, but we believe that it would be best if the Government withdrew this part of the Bill, but continued clearly to signal their intention to deal with the abuse of hybrid entities and hybrid instruments to create advantages through tax arbitrage. They should then consult fully and widely, not only with industry and business and with specialist practitioners in this country, but with our overseas trade partners, particularly the United States, which is a significant inward investor into the United Kingdom. They should also talk to the Dutch Treasury. The Dutch tried legislating in this area and found that it damaged the interests of the Dutch economy and Dutch business; they are now heading in precisely the opposite direction. 
In that way, the Government could include in the Finance Bill 2006 a properly thought out set of proposals, tightly drafted so that they could be implemented straight from the Bill, rather than have a provision with such wide scope that it needs an administrative commitment to narrow its implementation. In addition, they could minimise the risk to the UK's reputation by ensuring that the legislation addresses what it is intended to address and that the Government collect the right amount of additional tax—the amount of additional tax that they have identified as being their objective in this chapter. That may have the practical effect of limiting the yield that the Government seek, although in their statements they have made it clear that they do not seek to raise a tax charge that falls upon all companies using hybrid vehicles to make investments in the United Kingdom from the United States. However, doing what I suggest—withdrawing the provision, making it more tightly focused and bringing it back next year—will limit the scope of what could be hugely damaging uncertainty that could destroy jobs and investment among the overseas investment community and British business alike.

Rob Marris: I seem to recall that when we discussed social security pension lump sums on Tuesday, the hon. Gentleman was arguing for some flexibility to be built into the legislation, in case people took partial pensions. I shall not rehearse that debate now, Mr. Cook, but the hon. Gentleman's comments today seem contradictory. Even if the regime before us today is passed, it will be applied only if Her Majesty's Revenue and Customs issues a notice. Customs and Revenue cannot just drop on people; there has to be an active process. In a sense, that flexibility is already built into the legislation.

Philip Hammond: The hon. Gentleman is precisely wrong, but he has identified one of our key concerns about the arbitrariness of the regime. It is drafted extremely widely. On the most extreme interpretation, it could catch virtually all US investment into the UK, and we know that the Government do not intend that. They have created a regime of notice issuing for the Revenue, but there will be discretion in the way that  notices are issued; the Revenue will consider individual cases and form a view. In later amendments, we will come to precisely how those notices are to be dealt with.
The hon. Gentleman's analogy with our debates on clause 7 and following clauses is entirely wrong. Clause 7 is consequential legislation that amends the Tax Acts to deal with a type of income that has never before been envisaged—deferred pension lump sums. There was a danger that not making that amendment might result in those pension lump sums not being taxable—or in their being taxed quite differently from how the Government intended, certainly differently from that which the consensus in Committee suggests is the right way to go. That legislation was consequential; my point then was that it would be as well to draft it widely enough to accommodate changes in the principle legislation that it supports. 
The provisions on arbitrage deal with quite a different situation. I am somewhat surprised that the hon. Gentleman, who is a lawyer by training, appears to be arguing for a broad drafting of legislation so that the Government can be flexible about how they target taxpayers. If the hon. Gentleman thinks about what he has said, he will see how damaging that would be to the UK investment climate. Businesses making investment decisions will typically look at their post-tax returns to an investment over a relatively long time—the longer the better the Chancellor would say, as he likes the long term and not the short term—and any uncertainty is bound to lead them to take a worst-case approach in their modelling.

Stephen Hammond: My hon. Friend's point is better made when one reads through the legislation, difficult though that is for us all, because one then sees that it is drafted so widely that almost every hybrid tax-planning arrangement seems to be caught by this chapter and this clause. It would help to clarify things if the Government provided the Committee with clear examples of arrangements that are not caught by the clause.

Philip Hammond: My hon. Friend is right. I see that the Paymaster General has some complicated diagrams on her table; I might have some even more complicated ones to wave back at her. The Government's answer to my hon. Friend's charge will be that there has to be a UK tax advantage before any of the legislation bites. I suspect that much of today's debate will hinge on when a UK tax advantage arises and how an inward investor can be certain that his arrangements will not be deemed to have given rise to a UK tax advantage. Although it might seem easy to determine whether there has been a UK tax advantage, I hope to convince the Committee that it can be an extremely complex question.

Rob Marris: I rise to correct the hon. Gentleman gently on his remarks about my intervention. If he looks at the record, he will see that I did not put forward any proposition, but merely suggested that his remarks were contradictory.

Philip Hammond: On the specific point, the hon. Gentleman is wrong: my remarks were not contradictory. If he does not mind, I will sometimes extrapolate from what his comments as he does from mine.

Brooks Newmark: I do not want to get bogged down in language, but does my hon. Friend agree that there is a difference between flexibility and what the Conservatives are concerned about, which is uncertainty? A lot of the Bill's drafting creates uncertainty for the financial community, and although there is sometimes a need for flexibility, our concern is more driven by the uncertainty arising from the legislation.

Philip Hammond: My hon. Friend is absolutely right. We need only to listen to Ministers' words. Flexibility is good—the Chancellor used the word goodness knows how many times last night—but uncertainty is bad in almost all circumstances, certainly in anything to do with business.
I anticipate that there will be a certain obstinacy on the Government's part in response to my suggestion that it might be wise to withdraw this chapter of the Bill and return to the subject later. Notwithstanding our principle view that that should be done, we tabled some amendments that will allow us to discuss ways of ameliorating some of the more damaging effects of the legislation. We did that partly to test the Government on where they stand on various issues and how they see the legislation working, and partly to try to redress the balance in favour of the taxpayer where it seems that this legislation is badly skewed towards the revenue authorities in a way that is frankly out of kilter with much of our tax legislation. 
The group of amendments is large. I shall pick up certain themes and say something about each one in connection with the amendments that relate to it. I say again that the subject is complex, notwithstanding the assistance we have received with the drafting of amendments, for which I am very grateful. Given the technical detail, I acknowledge that some of the amendments will be imperfectly crafted, but I hope that the Paymaster General will take the essence of the question being asked in the amendment and deal with that. 
The first sub-group of amendments is designed to attack the move towards giving very wide administrative discretion to officials. It is proposed that the Commissioners for Her Majesty's Revenue and Customs—in old money, Inland Revenue officials—will issue a notice to a company when they believe that it ''is or may be'' within the scope of this legislation. To some extent, that flies in the face of the principle of self-assessment, which is that the taxpayer appraises his own affairs and makes a statement on them, and the Revenue looks at it in due course. We, and professional practitioners, have concerns about the scope that such a notice provision will give the Revenue for mounting what, in the jargon of the industry, are known as fishing expeditions—serving notices on the taxpayer, in effect placing the onus on him to demonstrate that he is not within the scope of the legislation and is not required to comply. 
Amendments Nos. 15, 17 to 20 and 22 to 28 amend the Bill so that it would be the special commissioners who decided whether to issue a notice after finding, on the balance of probability—that is on the lower, civil standard of proof—that conditions A to D set out in the clause ''are or may be'' satisfied, following an application by the commissioners to the special commissioners. Instead of officials from the Revenue, sitting in an office, deciding that company X is guilty and should be issued with a notice, we propose that the commissioners should prepare a case explaining why they have formed a reasonable view that company X is or may be within the scope of the legislation. I shall come back to the term ''is or may be'' under another group of amendments. The commissioners would then present that case to the special commissioners, who sit as what we might characterise as a tribunal. The special commissioners will listen to the commissioners' arguments and those of the taxpayer and come to a decision as to whether it is appropriate to issue a notice. That is the difference between a police officer signing a warrant and a police officer applying to a judge, who considers the facts and then issues a warrant. The amendments would create proper procedure at first instance. In the absence of such a procedure, to get a hearing, the taxpayer would have to go through the appeal procedure, which is itself not at all clear; we will come to that under groups of amendments to later clauses. 
The amendments would reassure the taxpayer community, in particular the foreign investor community, which, for understandable reasons, is quite nervous and unsettled by a proposal in a developed, advanced country for a regime that gives very wide discretion to Treasury officials to issue what is in effect a tax levy—a notice indicating that someone falls within a very widely drafted tax charge. Many corporations are used to operating in very different jurisdictions from that of the United Kingdom. Frankly, they are used to getting this sort of treatment in less well developed jurisdictions. It is not the sort of treatment that typically encourages and supports investment. The amendment would reassert an important principle of our tax system, which I hope the Paymaster General will be keen to defend: that if there is doubt, the matter should be resolved in favour of the taxpayer, not of the tax-gathering authorities. 
Amendment No. 15 makes the relevant change in subsection (1) of clause 24, which deals with deduction cases, so that the notice may be issued by the special commissioners, on the application of the commissioners, where the special commissioners are satisfied, on the balance of probability, that the company in question complies with conditions A to D. Amendment No. 20 makes the same change to the operative subsection of clause 26, which deals with receipts cases—investments made outwards from the UK. The remaining amendments—amendments Nos. 17, 18, 19, 22, 23, 24, 25, 26, 27 and 28—are consequential, and simply change references elsewhere in the chapter from commissioners to special commissioners. 
I hope that the Paymaster General will carefully consider our proposals. The Government have nothing  to fear from the amendments, the taxpayer has a great deal to gain in transparency, and UK plc has a great deal to gain in the resulting beneficial impact on the investment climate. It would send a message to people who have already expressed their serious concern about this part of the Bill. 
Amendments Nos. 16 and 21 would tighten the rules. As I said, clauses 24 and 26 allow a notice to be served by the commissioners if they consider that conditions A to D 
''are or may be satisfied in relation to a transaction''.
I ask members of the Committee to focus their attention on the words ''are or may be''. Those are very different tests; ''are satisfied'' is a perfectly acceptable test, but ''may be satisfied'' is a different order of test altogether, and is totally unsatisfactory. For the Revenue commissioners to consider that they are satisfied means that they need to satisfy themselves that the qualifying conditions do apply in the case, but for them to consider that the conditions may be satisfied merely requires them to be sure that they are not necessarily not satisfied. So they may be satisfied unless there is clear evidence that they cannot be satisfied. 
Let me illustrate my case. The Leader of the Opposition may be outside the Room. The hon. Member for Wolverhampton, South-West (Rob Marris) is clearly not outside the Room—

Rob Marris: I might be.

Philip Hammond: The hon. Gentleman has many qualities, but being both inside and outside a Room at the same time is not one of them. I can, quite reasonably, consider that the hon. Gentleman is not outside the Room; it is not possible for me reasonably to consider that he is outside the Room. However, it would not be reasonable of me to consider that the Leader of the Opposition may not be outside the Room. I must consider that he may be outside the Room, because I have no information as to his precise whereabouts. [Interruption.] I know that the Paymaster General has had the privilege this morning of sharing a sofa with him, although perhaps she did not share it with him, but he just warmed it up for her. Anyway, I hope that the point is clear: a test that merely requires the commissioners to satisfy themselves that the conditions may apply before they serve a notice is far too wide. Frankly, if they do their job properly, they will have to serve an awful lot of notices, because, in a large number of cases, they cannot a priori be satisfied that the conditions do not apply. That is not acceptable, and the amendments would therefore leave out the words ''or may be''.
We can convict a company only because we believe that it has done something and not because we believe that it may have done something, even under a civil standard of proof. The clause is designed to give the Revenue the power to make very wide fishing expeditions—one might even call them trawls—in the corporate sector. That is unacceptable and hugely increases the compliance burden on business and the uncertainty in the international investor community. 
Amendment No. 29 is a small point of grammatical clarification. I know that the Government hold education dear, but at line 12 on page 26, clause 28 includes the words: 
''the Commissioners could not have been reasonably expected''.
I think that the clause was meant to say, ''the commissioners could not reasonably have been expected''. The Minister will no doubt clarify that in due course. [Interruption.] I am glad that, in the Economic Secretary, we have a Minister hot from the Department for Education and Skills, and he will no doubt have guidelines on the matter. Before the Paymaster General says anything about grammar, she might want to check some of the basic grammar in her statement yesterday. I am not suggesting that she wrote it, but she will discover that the correct use of the apostrophe has not penetrated the whole of her Department.

Rob Marris: I like grammar myself, but can the hon. Gentleman explain why he did not object to clause 8(4)? Line 10 on page 9 starts with the word ''But'', which is clearly ungrammatical. He tabled no such amendment then.

Frank Cook: Order. I should not have to make this point, especially to hon. Members who are well qualified in the law, but it is not proper retrospectively to go over clauses that have been covered. It is also irrelevant to the point at issue.

Philip Hammond: Thank you, Mr. Cook. I am sure that I can have an agreeable discussion with the hon. Gentleman about these matters another time.
I shall not speak to amendment No. 30, which—this goes to the complexity of the issue—has been tabled or printed incorrectly, because the word ''not'' has been missed out. Notwithstanding that, I think that I have received an answer to my question. The issue that underlay the amendment will be addressed in discussions on other amendments that we have tabled and in further points that I shall make in clause stand part debates. 
Amendment No. 31 addresses the main purpose test that is included in the deduction cases in clause 24 only. Condition D of that clause requires only that one of the main purposes is to achieve a ''UK tax advantage''. There is not a similar provision in clause 26, which deals with receipts cases. That should suggest to the Committee that the Treasury acknowledges that the scope of clause 24 is much wider than others, and that many cases should not be caught under its provisions. 
In the run-up to the debate, I had a number of meetings with the business community. There is a genuine concern that there is a lack of understanding in the Revenue about the nature of complex commercial transactions—about how, in practice, companies go about their business, and the processes they go through in making their investment decisions. I will not mention any names, but I am told that at meetings Revenue officials have gleefully asserted that they have no business experience whatever. That seems  to be some kind of badge of qualification in the Revenue. 
The business community is telling us that because business investment decisions are usually assessed on the basis of post-tax returns, tax will always be an important consideration. It cannot be otherwise. If the measure of an investment decision is the post-tax return, not to consider tax would be a gross dereliction of one's duty to one's shareholders.

Helen Goodman: Surely the great frustration for the hon. Gentleman is that the Government have cut the rate of corporation tax, which is still far more competitive than those in other European countries. France is the nearest country to us, and its rate is 33.8 per cent. The rate for another European country that is in the G7 is more than 40 per cent. The figures are strung out within that range.
Although it would be naïve to think that the rates of tax and the post-tax return are not taken into account, practical experience suggests that that is not in fact the most important factor. Let me give an example. I was in my constituency yesterday. Electrolux, a large multinational company with plants in Italy, Germany, Sweden and Denmark, has opened a new production facility there. No mention was made of tax. It was concerned about the quality of engineering and the skills of the people.

Philip Hammond: I welcome the hon. Lady's contribution, but a couple of points need to be made about it. First, if she wants to make comparisons with the countries in the European Union, she is factually wrong. In terms of the enlarged European Union, we do not have the lowest rates of corporate tax. Secondly, what matters is not the rate of tax but the effective burden of tax. As with income taxes, it is not just the headline rate that matters; it is also what the allowances are and the effective rate of the tax that people pay.
I accept the point to some extent because the UK's corporate tax structure is not as burdensome as that of many large European countries. However, there is a problem and there is no room for complacency. We are heading in the wrong direction while many of our European competitors have got the message that they need to be more tax competitive and are moving in that direction. Therefore, we must keep the matter constantly under review. 
On the Electrolux example, I do not know the financing structure that it uses, but it is a sophisticated multinational and I suspect that she has just made my case for me. Electrolux will be using financing structures to make its investment in the UK which ensure that the post-tax return is satisfactory to them and meets their hurdle-rate requirements, and that an investment in the UK is the best that they can make with the available funds for that purpose at the time. If we change the tax backdrop against which a company like Electrolux has to test its investment proposals, we run the risk of upsetting that geometry and finding that it is better for Electrolux to make that investment in Latvia or France, or in Belgium or the Netherlands, which are reforming their systems. 
Although I am delighted to hear about the Electrolux investment in the hon. Lady's constituency, my fear is not about investments that have been made in the past. I fear that if we are not careful, five or six years down the line—perhaps far enough away for the Chancellor of the Exchequer, or the Paymaster General, not to be too worried about, although in the Paymaster General's case, she needs to think long about this—there is a real concern that we will see an impact on UK investment. Nobody knows what, or how significant, that will be, but if the Bill goes ahead in its current form, I urge the hon. Lady to consider—perhaps even to inquire—whether Electrolux has used what is known in the industry as plain vanilla financing for its investment in the UK, or whether it has had the investment through some offshore financing partnership that would count as a hybrid entity. It may be that Electrolux can structure that financing through a hybrid entity that has lowered the cost of capital or increased the post-tax return sufficiently for that investment to have met its hurdle rate.

Stephen Hammond: The KPMG survey suggests that in 1997 the effective corporate tax burden in the UK against the EU 15 was 5 per cent. lower. It also suggests that in 2005, for the first time, the effective corporate tax burden in the UK will be higher than the EU average.

Philip Hammond: My hon. Friend is right. Anecdotal evidence gained from talking to businesses operating across Europe supports the view that although the UK rate has remained static, the overall burden of tax in the UK is increasing.
Remarkably, at a time when economic growth is predicted to be relatively modest, the Government's Red Book is suggesting that next year corporation tax receipts will increase by 28 per cent. compared to this year. That is a phenomenal rate of increase. Notwithstanding the raid on North sea oil companies that was mounted in the Budget, there is no clarity in the corporate sector as to where this huge increase in corporation tax will come from. It will not come from the City—we have had some relatively good news on results from there—and it will certainly not come from manufacturing industry, the retailing sector or the services sector on the basis of the information that we are seeing. 
This 28 per cent. increase in corporation tax receipts is wholly mystifying to many in the business community and tends to reinforce the concern that the Government's so-called anti-avoidance legislation, which is drawn widely, is perhaps deliberately creating a flexible mechanism, which, by the simple expedient of changing the Revenue guidance, could be used to bring in a significantly higher level of tax revenue to fill the black hole that the Chancellor faces in his fiscal projections. 
The concern is, of course, that companies contemplating investment decisions in the UK may, when they consider the test about tax being one of the main purposes, feel obliged to go through some tortuous, unnatural and artificial processes in  reaching their decisions. The prospect arises of companies structuring discussions for minuting purposes to ensure that they do not discuss tax—a quite proper consideration in an investment decision—in case, at some later date, the commissioners cite those discussions as evidence that tax was a main purpose. We are inviting companies to develop, quite unnecessarily, a wholly artificial regime, in a way that could be quite damaging to the quality of investment decisions, simply to avoid being trapped by one of the main purposes tests. 
We have tried to make it clear that the Bill should be tightly focused on a situation in which the gaining of tax advantage is the main purpose of a transaction—in other words, the transaction would not have taken place were it not for the tax advantage. Amendment No. 31 would, to that end, remove the words 
''or one of the main purposes''
from subsection (5), which defines condition C. Under the amended subsection, the test would be that the structure would not have been adopted but for the tax advantage. Surely the Committee will agree that that is the correct test. 
I have more questions about how such a calculation of the comparison between the post-scheme result and the notional alternative should or could ever be calculated. We shall deal with those issues when we discuss clause 25.

Dawn Primarolo: Good morning, Mr. Cook. Like the hon. Member for Runnymede and Weybridge (Mr. Hammond), I, too, welcome you to the Chair and look forward to our proceeding in a businesslike fashion.
I congratulate the hon. Gentleman on presenting his case clearly. I shall attempt to respond in kind by explaining the Government's approach to the clauses in question, and to his amendments and his general comments. 
The three clauses are part of a package of measures introduced by clauses 24 to 31 and schedule 3, which prevent a loss of UK tax that arises as a result of avoidance through arbitrage. I should make it clear that the measures apply only if companies deliberately exploit arbitrage opportunities and if that gives rise to a loss of UK tax. 
The provisions are therefore aimed at contrived avoidance structures. We know about those because of the disclosure regime. The hon. Gentleman has, in making general points about disclosure in previous debates, including on the Floor of the House, pressed the Government for action on receipt of disclosure. This is one example, as I explained before, of the Government acting on disclosure; we can use legislation, among other methods, such as assessment or, ultimately, litigation. Therefore, for him to ask now for the legislation to be withdrawn, and for consultation, is a bit of a volte-face on his part. The provision is very clear. 
The hon. Gentleman said that the problem was minor. Let me tell him what tax advisors are telling HMRC. They tell us that two thirds of all investment  in the UK by multinationals now uses hybrid entities or instruments, so the problem is not minor.

Brooks Newmark: Will the Paymaster General give way?

Dawn Primarolo: Let me make some progress. The hon. Member for Runnymede and Weybridge spoke for most of the morning. It is important at the beginning of the debate, which will obviously be a long one, to lay out the principles, and then we can engage on them. However, if the hon. Member for Braintree (Mr. Newmark) allows me to put the principles on the record, I shall be happy to give way another time.
The schemes are designed to exploit the tax differences to achieve a UK tax advantage. The hon. Member for Runnymede and Weybridge also said that we should have consulted. Well, HMRC has consulted widely with business representatives, both between the publication of the first Bill and the second Bill and at an open day on 6 June, when detailed discussions were held. As I have explained, the legislation is a result of disclosure on avoidance. He knows full well, because all Governments follow the process, that to consult on avoidance, thereby giving people time to find other ways to avoid what has been discovered, is not necessarily the wisest way for an Administration to proceed. I can give examples if he presses me. Conservative Governments used the same procedure in proceeding on anti-avoidance.

Philip Hammond: Will the Paymaster General give way?

Dawn Primarolo: On the point of avoidance, or can I proceed to the points on arbitrage?

Philip Hammond: I appreciate that the Paymaster General wants to set out her case, but she has made two important points on which I should like to probe her. First, I think that she said that the legislation would apply only to people who sought to exploit contrived arbitrage arrangements and gain a UK tax advantage. Does she accept that where, for example, there is a regulatory capital reason for using a hybrid instrument, and where there is a good reason for a bank structure to do that, the main purpose is clearly not to gain a UK tax advantage and those entities would not be caught?
Secondly—the Paymaster General might be grateful that I am asking two questions—she said that the tax loss that I referred to as relatively small was not small, because two thirds of all investment in the UK came via hybrid entities or instruments. Is she suggesting—logically, she must be—that all those hybrids would be caught by the legislation?

Dawn Primarolo: No, and if the hon. Gentleman allows me, I shall proceed on the same basis as him and explain the question of UK tax loss and how it works. I will certainly deal with the points that he raised. Indeed, he made a general point about arbitrage which I also want to make.
Arbitrage is the exploitation of differences between or within national tax codes. It can result, for example, in a tax deduction being given by the UK and another  country for the same expense—what the hon. Gentleman referred to as a double dip—or in a deduction being given in the UK when tax on the corresponding receipt has been avoided. To return to his point, I stress that the Government see nothing wrong with arbitrage itself, which is inevitable, given the variations between national codes and the existence of laws that apply to some companies and not others. However, recent UK experience—in particular, as I said, through disclosure—has shown that the presence of arbitrage opportunity, such as a double deduction for the same interest expense, has led to a distortion of the commercial behaviour of multinational groups, resulting in the setting up of schemes that are structured deliberately to exploit that arbitrage and avoid UK tax. 
The hon. Gentleman talked about the complexity of the rules, but HMRC is already aware of two very large groups that have reorganised their structures in anticipation of the legislation because they would be subject to the rules. It is always difficult to say, ''How much difference would that change make?'' Although we do not have a figure for the additional UK tax, the extra profit recognised in the UK in such cases is more than £150 million a year. In addition, in anticipation and on a provisional basis, HMRC has received five informal clearance applications from companies that are already asking, ''What if?'', about the legislation. 
Both examples demonstrate clearly that companies, which are already dealing with those hugely complex regimes, are perfectly capable of understanding exactly what the legislation is targeted at.

Philip Hammond: The right hon. Lady spoke about a specific group, which obviously she has not named, that would have been liable for £150 million-worth of additional tax under the legislation.

Dawn Primarolo: That is not what I said.

Philip Hammond: I thought that the Paymaster General said that the loss of tax under the group's arrangement was £150 million. Surely it must have been mistaken in interpreting itself as falling within the scope of the legislation because the Government are saying that the total yield will be only £200 million. It cannot possibly be the case that one company, had it not changed its arrangements, would have been liable for £150 million. Will she clarify that?

Dawn Primarolo: When the hon. Gentleman reads the record, he will see exactly what I said. I shall repeat it. Although we do not have figures for the additional UK tax, the extra profit recognised in the UK in such cases for the two large multinational groups is £150 million a year. That makes the case.
The legislation prevents companies from entering into artificial schemes designed to exploit the difference to achieve a UK tax advantage. Given that there must specifically be a UK tax advantage for the deduction legislation to apply, I reassure Committee members that the UK will not act, as some have suggested, as the world's tax policeman. Companies that are not avoiding UK tax will not be affected. The people who made that observation, and are quoted in the press, did so before they properly understood how the legislation will operate. 
It is very clear. The legislation will not apply to arrangements that do not affect UK taxation. It is important to note that the avoidance legislation will be brought into play only if all the conditions set out in the legislation are met—not just some, but all of them—and the Commissioners of Her Majesty's Revenue and Customs issue a notice to the company requiring it to take account of the application of the rules. 
The hon. Gentleman described that as wide discretion. HMRC will not be exercising discretion in the issuing of the notices, but it will adopt a consistent policy of issuing notices where all the conditions are met.

Philip Hammond: Will the Paymaster General give way?

Dawn Primarolo: Perhaps it might help the hon. Gentleman if I finish the point.
The conditions are not met unless a scheme has, as its main purpose, the achievement of a UK tax advantage. HMRC has issued guidance on, and examples of, how the legislation will apply, and has asked for comments from businesses. Companies can approach it for clearance if they are still unclear—although I doubt that they will be—about how the provisions apply. Some companies are doing that in line with the precautionary principle.

Philip Hammond: When the right hon. Lady reads the record—she is very keen to tell me to read the record, which will not, of course, be available until tomorrow—she will see that she said that companies will be caught only when all the conditions are satisfied, but according to her Bill, the commissioners can issue a notice only when those conditions are or may be satisfied.

Dawn Primarolo: I shall come to that when I explain how the amendments would operate and why the hon. Gentleman's proposition on the use of the word ''may'' is incorrect. Addressing that point in the context of his other amendments is a more sensible way to proceed.

Stephen Hammond: The right hon. Lady mentioned the guidance notes. The first example that they give says that condition C depends on facts and circumstances. At the end of that example, however, they state that HMRC will be satisfied without considering facts and circumstances. Some of the examples seem to be internally contradictory.

Dawn Primarolo: I understand that Committee members might be experiencing some difficulty on this point, but my experience when I have discussed the matter with companies, and the experience of HMRC on its open day and in other discussions, is that companies are not struggling with the concept. I shall explain why. It is perfectly reasonable for Committee members to seek reassurance and for the Minister to give an explanation.
As I said, it is important to note that this is avoidance legislation, which comes into play only if the conditions are met. There are separate rules that deal with UK deductions and UK receipts. Clause 24  relates particularly to condition C, which we would all agree is the most important one and the one that most of the debate is about. The clause sets out the conditions that must apply before the deduction rules can apply. 
There are four conditions—A to D. To summarise, condition A requires that a transaction forms part of a qualifying scheme. I shall return to what those terms mean when we consider schedule 3 because you might say that it is not relevant to this point, Mr. Cook. Condition B requires that there is, or will be, a deduction for tax purposes as a result of the scheme. 
Condition C requires that at least one of the main purposes of the scheme is to achieve a UK tax advantage. That condition does not address all the purposes of each transaction in isolation, but addresses the main purpose of the scheme as a whole. I shall return to that in a moment, because it is the subject of one of the hon. Gentleman's amendments. Condition D requires that the tax advantage in question is more than a minimal amount. 
I think we all agree that condition C is the most important condition that must be satisfied. There must be a scheme which has, as its main purpose, the achievement of a UK tax advantage. There are many examples of purpose rules in UK tax avoidance legislation, and by necessity they can be determined only on a case-by-case basis. Those purpose rules operate perfectly well elsewhere in UK legislation. Companies can understand and deal with them.

Philip Hammond: Usually through the clearance system.

Dawn Primarolo: We will come to that.
Those rules are not alien, but they need to be determined on a case-by-case basis and by reference to the individual facts and circumstances relating to each taxpayer. However, HMRC has issued detailed guidance, which continues to be updated, in consultation with others, to provide as much certainty to business as possible. 
Clause 26 introduces separate rules applying to receipts. Clause 28 sets out the procedure governing the issue of the notices under the legislation. I shall cover the operation of those clauses in more detail later. 
The group of amendments divides naturally, as the hon. Gentleman suggested, into two subgroups. The first consists of all the amendments apart from amendments Nos. 30 and 31. It would alter the way in which the notices under arbitrage legislation are issued. The second group would alter the conditions that need to be met for the legislation to apply. 
As they stand, the clauses require a notice to be issued by the commissioners of HMRC if they have reasonable grounds to believe that legislation might apply. HMRC has responsibility for the care and management of corporation tax and is responsible for its administration. The amendments in the first group would instead require notices to be issued by the special commissioners, who are an independent tribunal body whose responsibility includes hearing appeals against corporate tax assessments. 
Those amendments would not alter the effect of the legislation, but, significantly, they would add new administrative and legal costs to the companies it affects and to HMRC. The Opposition constantly tell us that we should not be doing that, but their amendments—for no gain on the principles of the legislation or the rights of taxpayers—would simply put in place a bureaucratic, longer method to achieve the same end result, and it would be more costly to businesses.

Philip Hammond: Surely, what the Paymaster General says is not correct. The taxpayer would be burdened with costs only if he chose to appear and argue his case before the special commissioners. If he was happy to accept a notice, the commissioners would simply apply, the special commissioners would issue it and the case would go unanswered. The proposal would give the taxpayer an opportunity to be heard at first instance.

Dawn Primarolo: In fact, the amendments would require every case to proceed immediately to the special commissioners for a hearing whether or not the parties disagreed with one another. If that would not cause unnecessary bureaucracy and unnecessary extra  costs—let us remember that all cases would have to be dealt with in that way—I do not know what would.
The hon. Gentleman acknowledged the difficulties of drafting amendments and the complexity of the legislation, but he cannot seriously be suggesting, as his amendments are, that every case has to be seen immediately and proceed to the special commissioners for a hearing whether or not the parties disagree with one another, and that somehow the companies would not therefore face extra cost and delay.

Philip Hammond: Can the Paymaster General give the Committee an estimate of how many notices we are talking about? How many does HMRC expect to issue in the first year of operation of this legislation?

Dawn Primarolo: Does that not depend on whether companies look at the legislation and decide to comply with it? The notices would only be issued in cases in which the Revenue believes the conditions are met. I sincerely hope that should the clauses be agreed to, companies will comply with the legislation.
It being twenty-five minutes past Ten o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order. 
Adjourned till this day at Two o'clock.